One Financial Worth a Look

It may seem crazy to recommend looking into mortgage companies, but in this case it would be crazy not to, writes Paul Goodwin of Cabot Wealth Advisory.

It’s a basic principle of ecology that when there is a lot of something to eat, nature will see to it that there’s something to eat it. The same principle holds for economics, as well.

And if there is anything that the global economy is oversupplied with right now, it’s just got to be underperforming mortgages. Bad mortgages are a major reason the global economy in general, and the US economy in particular, is having such a hard time getting going again.

The Fed is taking about $40 billion of these mortgages out of circulation every month, but the supply is still enormous. And that’s where Ocwen Financial (OCN) comes into the picture.

Ocwen used to be a pretty standard mortgage lender, but it has shifted its main focus onto mortgage servicing—the collecting of payments and late fees, renegotiating terms, and if all else fails, conducting foreclosures. Banks are happy to be rid of the responsibility and estimates are that there may be $3 or $4 trillion of mortgage assets that will be subbed out to servicers like Ocwen in the next few years.

Ocwen’s 38% revenue growth in 2011 pales in comparison to the 90% revenue growth it reported in the latest quarter or the 100% growth it booked in the second quarter. And earnings estimates for the year are estimated to come in at 87%, with 2013 estimates now at a whopping 210%!

OCN went on a strong growth spree from November 2010 to February 2012, roaring from $8 to $17. But after a mild pullback that lasted ten weeks, the stock really exploded, ripping from $14 last May to $38 at the beginning of October.

Since then, OCN has been trading sideways, including five weeks in a tightening consolidation between $34 and $36. That’s the kind of flat base that can produce real sparks when the stock makes a move.

The catch, of course, is that you don’t know which way to move is going to go. So while a sizable buy of OCN might pay off, it could also land you with a sizable loss. My advice is to put OCN on your watch list and monitor it closely for signs (moves either way on increasing volume) of a breakout from this tight trading range.

Ocwen has the story and the numbers, and if the chart signals that it’s time to buy, quick action may give you a great opportunity.